3/6: Taking the Pulse of the Economy

Is the U.S. economy really in a recovery? What about gas prices, and what role could the economy play in this election year? Associate Editor of Barron’s, Michael Santoli, spoke with The Marist Poll’s John Sparks about this and more. Listen to the interview below.

John Sparks
Michael, some folks are saying our economy is in a recovery. Are we indeed in a recovery?

Michael Santoli:
Yeah, I mean in most of the measurable ways, we certainly are in a recovery. I mean the basic way is to say that at the end of last year, the total size of the economy, the nominal gross domestic product was basically where it was at the peak in 2007. So in other words, all the economic activity that was lost during the financial crisis and the recession had been recovered in nominal dollar terms, and we’ve basically had positive economic growth statistically for a couple of years now and created close to four million jobs in the last two years. Now, the problem is the hole was so much deeper when this kind of unsatisfying recovery started because the recession was so bad that we haven’t recouped obviously all of the jobs that were lost. It really regained only less than half of the jobs lost. And, of course, the housing market, even though it might be showing a little bit of signs of life, is well, well, well below where it was then both in terms of activity and home prices. So, a lot of the things that people can kind of see and touch and feel don’t really appear as if this is a recovery. But, in the ways that an economist or a commentator would talk about it, yes, it’s a recovery. You’re kind of better off now than you were a couple years ago.

I also would finally point out that over the last 12 or so months, the monthly rate of employment growth is basically the same as it was at a similar point following the prior recessions in the early 2000’s and the early ’90’s in terms of the absolute number of jobs created per month. The problem, again, is that we had lost so many more in this recession that it just doesn’t seem like it’s quite enough. So, I don’t think the economic recovery is doing anything particularly unusual or perverse, it’s just that things had gotten so bad that what’s been achieved since then just based on what the business cycle can do has not really been evident to so many people.

John Sparks
One thing that is on my mind concerns oil, Iran, the Straits of Hormuz, rising gasoline prices.

Michael Santoli:
Well, it’s definitely one of the big swing factors from this point on that’s going to determine whether we can kind of maintain this momentum that the economy had coming into this year or not. That’s for sure. So obviously the fact that gasoline prices are significantly higher now than they were one year ago is going to be a drag, and you see the retail sales numbers were not great this past month, so I do think it’s going to be a bit of a headwind. But, at these levels of both gasoline and crude oil prices, it’s not yet enough to really impede or derail what’s now a decent, if unsatisfying recovery, simply because we’ve been here before in terms of these prices. It doesn’t feel good, but we have. And, also the pace of increase in energy prices has not quite been as rapid as it was say in 2008 when we went from about $100 a barrel for crude oil to $150 in a very short period of time. So, we’re still kind of that in mode of: okay, fine, higher oil prices are more or less telling us that the global economy is demanding more energy and it’s growing to some degree, and then of course you have the Iran stuff that’s adding a premium on top of that. But to me, it’s mostly about the demand continues every single day to slightly outstrip supply, so the trend is higher. So, I do think there’s that risk that that’s the thing that potentially chokes off economic growth here, but we’re not yet at that level. We’re not yet at that real panic point to me when it happens. I would point out too that if you adjust for inflation, the price for a gallon of gasoline in this country throughout history has been between $2 and $4 a gallon, so clearly we’re on the upper end of that range, but we’re not in unchartered territory, and price per mile driven is actually down from significantly from the peak just because we’re a bit more efficient. We’re driving less these days.

John Sparks
You’re in an election year. What can we expect between now and the November elections as far as our economy goes?

Michael Santoli
Well the economy came in — like I say, came into the year looking a good deal better than it did several months earlier just because you had the European crisis that was sort of a finger in the dike there, and the banking crisis didn’t really spill over just yet. And companies here are quite strong, and they’re actually spending a fair bit, and business investment has been pretty good. And the consumer, even though we’re nowhere near the heavy spending days of a few years ago or just speculating on homes and all that other stuff, it’s just in better condition. The cost for the average consumer to service his or her debt is down to levels that were common in the 1980’s. So, even though we have so much debt, people can kind of afford to spend because the cost of servicing that debt is relatively low. So, I do think between now and the election, we probably should have kind of persistent kind of slow growth in spurts and then pulling back to slower growth. So, to me, the trends look like they’re relatively positive going into the election, but I don’t know that it’s going to be so dramatic that it’s going to be quite obvious exactly how, say, the election goes simply because the economy’s gotten up a huge head of steam. I don’t really see that as being very likely. There’s still these constant threats that are out there that could really derail the growth story at any moment.

John Sparks
No president since the Second World War has ever been re-elected if the unemployment rate is higher than 7.2%. Now January, I think we were at 8.3.

Michael Santoli:
Yes.

John Sparks
Will Obama benefit… Will Obama benefit if the recovery goes at the pace it’s going right now?

Michael Santoli:
Wel,l first of all, it’s unlikely that, unless we really go off to the races, that the unemployment rate does go down below 7.2 in the next six or seven months. It could happen, but it’s unlikely. That being said, all those numbers are completely valid except that the sample size is so low. I mean there’s only been a couple of elections when you’ve had the unemployment rate above that level, and I would — I guess what I would say is it’s the trajectory of the unemployment rate that’s probably a little bit more important than the absolute number. So, at this point, the world knows those statistics, and yet the kind of polls and the betting, the political betting sites that you can find out there are still kind of giving a slight edge to Obama, mostly because the incumbent tends to have that advantage, like the home field advantage but… so at this point, I don’t think that the economy is going to be so great that it’s a no-brainer that there’s a second term, but I also don’t think we can cling too tightly to that rule of thumb on 7.2 or plus or minus just because there just haven’t been enough elections to — for me to really think that there’s a ton of statistical significance there.

John Sparks
Sure. Now the Dow was just below 8,000 when the president took office, lately it’s been vacillating around 13,000. What do you see for the Dow down the road for 2012?

Michael Santoli:
Well, I actually think it’s a similar story where we’ve come a long way. We definitely have kind of built in a lot of good news into stock prices at this point, but I think we’ll probably have a little bit of turbulence. If tradition holds, you have a little bit of turbulence and a little bit of kind of downward movement maybe into the summer, spring or summer. And then, most likely somewhere around the election, it tends to rebound, and I actually think that business conditions will probably support that. There is an upward bias at this point to the market just because a lot of folks have been kind of under invested in stocks. We… this bull market that’s been going on roughly since, by coincidence, roughly since Obama was in office (I say “by coincidence” because he had the good luck of coming in just after the stock market had been cut in half in a few years.) is — it basically has been tested a couple of times pretty well, so we’ve… It’s not been just sort of like kind of greedy straight up in the sky type of move, it’s been pretty difficult along the way to get from 8,000 to 13,000. But usually there’s a good harbinger that there’s actually underlying business strength that’s driving things, so I think there could be a little bit more upside. I don’t think it’s going to be like the ’90’s where we just kind of coin money just by putting a few bucks in the stock market, but I do think that we’ll probably have a little bit of indigestion period, maybe we back off a little bit in the next several months, and then maybe finish out the year pretty strong. In fact, the pattern historically is that if an incumbent, no matter who the incumbent is, is re-elected, the stock market does better than if the incumbent is voted out, which kind of makes sense because the pre-conditions for an incumbent being voted in again is obviously the world doesn’t look so terrible.

John Sparks
Consumer spending, what do you see the rest of this year?

Michael Santoli:
I think just slow and steady. I really don’t see it taking off. I mean it’ll kind of probably advance in line with job and income growth. There’s definitely been in addition to just obviously being the tremendous challenges of unemployment and great jobs not being abundant, you have a psychological change. I don’t think that people are very willing to take on a bunch of debt just to feed their consumption habits as they were several years ago, so I feel like we’ll kind of just trudge along and grow slowly on the consumer side, but definitely in a positive direction just because people can generally afford to do it in a sober way. And hopefully if job growth kind of continues the current trend, they’ll have the capacity to do that.

John Sparks
Do you see anything looming on the horizon that could derail this slow recovery that we seem to be in?

Michael Santoli:
Yeah, the one obvious… Well, the couple of obvious things, and we already talked about the — an energy shock, which could certainly happen. I mean whether it’s because of hostilities breaking out somewhere, or just because we get this trading move in oil like we did in 2008, people just like pile into it and it creates a shock to the system. A couple of other things that really could go wrong is a major economic accident in China would be a big deal. I mean they’ve basically been kind of managing their economic growth pretty well with certain hiccups along the way, but there seems to be a bit of a real estate bubble there. If something really kind of goes off the rails in China, they’re such an important piece of incremental bit of global economic growth that that’s a problem. And then finally, Europe’s not a done deal. I mean even though we’ve kind of had these measures that have taken the risk of an absolute all out panic and crash off the table for the moment, there’s so many delicate negotiations and so many wild cards over there that it could kind of just feed into the banking system both here and over there very quickly, and I feel like people wouldn’t really wait around very long before getting worried and pulling in loans and tightening up credit and all that kind of stuff again. So, those are the major things that I think that are out there as the obvious risks. Of course, you always have to acknowledge that sometimes it’s that thing that you don’t predict that’s out of the blue that really hits us.